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2011-06-16 06:48:19
SINCE 2004 sales by volume of LCD flat-panel screens, used in televisions, computers and mobile phones, have increased tenfold, and their prices have fallen by three-quarters. This has been wonderful for consumers, who have enjoyed an ever wider choice of increasingly affordable gadgets. But for the makers of these screens, business has been brutal. Having started out with rich margins, by 2006 they were barely breaking even. The fast pace of technological progress lowered production costs and boosted demand, but also made it easier for new entrants to join the market. The expense of building a manufacturing facility is excruciatingly high, at around 25% of sales revenues. But the rival producers have kept on building plants, often giant ones that increased the industry's overall capacity by as much as 30% at a stroke.
The result is that between 2004-10 manufacturers actually lost a combined $13 billion, estimates Alberto Moel of Sanford C. Bernstein, a brokerage firm. He calls it "a generous transfer of value from shareholders to consumers." Things cannot go on like this: a shake-up seems certain.
As things stand, Samsung and LG from South Korea dominate. Japanese firms together produce a huge volume, but the country has so many firms with small market shares that they cannot achieve the scale to keep costs down or to raise capital to invest in getting ahead of their rivals. So, they meander into mediocrity. Taiwanese and Chinese producers are developing grand scale and good quality, thus making life harder for their rivals, even though they are only occasionally profitable themselves.
Consolidation, especially among the Japanese firms, would make sense. Toshiba and Sony are said to be close to a merger of their small and mid-size LCD-panel operations, supported by $1 billion from a government agency, the Innovation Network Corporation of Japan (INCJ). The state's investment would give it a roughly 75% stake, according to Nikkei, a Japanese financial-news provider. The argument is that the business is not sustainable unless they combine forces, and that the firms need state aid to make that happen. Whether Japanese taxpayers want to bail out the LCD makers for failing to merge or exit their businesses earlier is an open question, as is whether the government can be an astute business owner.
Next, there is Sharp. It spent a fortune leading the industry's technical edge, by increasing the panel size from one production generation to another. For a while this made sense: each new generation pared costs by as much as half. But the size of its screens grew to the point at which they became unprofitable, because so few consumers wanted them that large. Sharp is now rejigging its operations to make more of the small LCD panels that go into tablet computers and mobile phones. This will take it into more direct competition with Hitachi and the Toshiba-Sony-INCJ venture if that comes to pass; so the market will remain pretty crowded.
Sharp is also considering tying up with Chimei Innolux, a division of Hon Hai in Taiwan (also known as Foxconn in China) for mid-sized screens between 20 and 40 inches, where competition is fiercest. Sony has already sold some television factories to Hon Hai, and outsources to it the assembly of many of its televisions. Hitachi is said to be in talks with Hon Hai too. Thus corporate Japan's great rival is not only the cause of its distress, but also its saviour.
One can only wonder why the Japanese firms did not see sense earlier and merge among themselves to strengthen their positions. Instead, they find themselves scrabbling to survive, at a deeply unprofitable end of the business. And things are set to get worse. Japanese executives talk with trepidation of "the 2012 problem": next year China's output of LCD screens is set for another great leap forward, to double the level of 2010.